– by New Deal democrat
This month we started the month with not just the usual two important reports on the leading sectors of manufacturing and construction, but the JOLTS report for August as well (which I will summarize separately).
In the big picture, I do not see the US economy falling into recession unless either both construction and manufacturing are in synchronous decline, or else at least one of them contracts very sharply.
Further, because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.
Including August, here are the last six months of both the headline (left column) and new orders (right) numbers:
APR 49.2 49.1
MAY 48.9. 45.4
JUN 48.5. 49.3
JUL. 46.8. 47.4
AUG 47.2. 44.6
SEP 47.2. 46.1
Here is what they look like graphically:
The three month average for the manufacturing index is 47.1, and for the new orders component 46.0. For the past two months, the average for the non-manufacturing headline has been 51.45 and the new orders component has been 52.7. That means on Thursday the threshold for the September non-manufacturing numbers is 51.0 and 48.6 respectively for the economically weighted average not to forecast recession.
Turning next to construction spending, nominally total spending declined -0.1% in August, while the more leading residential construction spending declined -0.3%. Here’s the long term picture:
A post-pandemic close-up shows that – after revisions – spending may have topped this past spring:
Adjusting for the cost of construction materials, which declined -0.3% for the month, the picture is somewhat more sanguine, as real construction spending was up 0.2%, and residential spending was unchanged:
So deflated, both total construction spending is at its highest level since 2007, except for this past May, while residential construction spending is lower than various months in 2021 and 2022, as well as several months earlier this year.
To sum up: with this month’s information, manufacturing is in a moderate decline, while construction is on the brink, as faltering residential construction is balanced by supercharged manufacturing construction. Last month I concluded that “Basically the picture is of weak, but overall still slightly positive leading sectors of the economy.” This month the data is even weaker, with slightly *negative* combined leading sectors of the economy. Depending on the ISM non-manufacturing data Thursday, and leading data from the jobs report on Friday, I could potentially hoist a “recession watch” yellow flag (or not!) by next week.
